Appraisals: Comparing Apples to Lemons
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Ever since the foreclosure epidemic started, builders have complained that it makes no sense to use foreclosed properties as comparables when assessing the value of new homes, even if they do account for half of home sales in some markets. Foreclosed homes may have the same bedroom and bathroom count, they may have the same square footage. But the previous owners may have pulled the home's copper wire, taken the appliances, or broken the granite countertops out of frustration of dealing with the bank.
The problem is that appraisers in most cases never go inside the house to inspect. They get the record for the sale price of the home, stand at the curb, and eyeball the home to determine its value. They may be looking at a home that's actually worth 10 or 20 percent less because its interiors or its systems are a mess. The home may have lost even more value because a cash-strapped bank was frantic to unload it.
Not only have builder complaints about unfair appraisals largely fallen on deaf ears, but a new system went into effect on May 1 that may drive down appraised values even further. Builders are likely to see more situations where buyers are perfectly willing to pay $250,000 for a new home, and banks are perfectly willing to make a loan for that amount, but the appraisal comes in at $220,000, wiping out all the profit in the deal, or killing it completely.
Under new rules that apply to any mortgage sold to Fannie Mae or Freddie Mac, loan officers, mortgage brokers, and real estate agents can no longer hire appraisers directly to do the work. Instead, they have to work through an appraisal management company. The cost of the typical appraisal is going to increase by about $200 to pay for the services of a middleman.
Critics of the Home Valuation Code of Conduct say these management companies are more often hiring appraisers who aren't familiar with resale values in neighborhoods. They may not know the history of the neighborhood--how values have always held up due to good schools, strong community fabric, or adjacent shopping. They may not understand that the foreclosed property they are eyeballing is an exception to the rule.
Yesterday, the National Association of Home Builders issued a statement on the situation, arguing that using foreclosures and distressed sales as comparables "without adequately reflecting the differences in the condition of the respective properties is needlessly driving down home values." The group called for "proper regulatory guidelines" for use on foreclosure or distressed property sales.
What's your recent experience with appraisals?